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Business Owners: Obtaining consumer credit



Business Owners: Obtaining consumer credit.

Maxim Solntsev, SDM-BANK CEO


A friend of mine, the owner of a small enterprise, was once complaining that he could not obtain a personal car loan in one of the big industrial banks actively advertised in Mass Media. He was lost in astonishment: his chain store system was generating good profits, all the papers and certificates were in place, and there was no reason why the bank should turn down the application for credit. That’s what he thought. But the bank had a different perspective.

As a matter of fact this kind of situation is quite typical when it comes to small business owners, who basically bare full responsibility for their returns. Services like car loans, consumer loans, or mortgage loans oftentimes turn out to be unobtainable for them.

Within the meaning of industrial banks wage and salary earners have much more stable and reliable returns than businessmen do. Standard consumer loan conditions suppose that an employee, if earning a fixed amount of money and being a professional, is less dependent on their employer. And even if they lose their job, it will be no hard for them to find another one within the similar salary range.

In most cases industrial banks use Scoring System for data manipulation in making decision on personal loan approvals. It means that all the data, including applicant’s salary, is analyzed using a certain algorithm, which then generates a point-based credit risk grade. And the bank decides on a loan approval based on this grade. This rather “mechanical” way of data manipulations makes it possible for the bank to save a great deal of money and time spent on making retail loan decisions.

But it is not as easy to determine an entrepreneur’s credibility. Standard programs used for personal consumer and mortgage loans do not go well there. Indeed, if the business goes bankrupt, there is no guarantee that the entrepreneur will right away find a new job and earn as much money. Therefore it is not enough to know how much money an entrepreneur makes now – the bank also needs to analyze their business financial circumstances. And this analysis does not go along with concepts of decision making in mass retail lending.

Retail loan oriented banks understand that the time spent on analyzing the business of a potential customer could have been used to generate 10 standard loans. Besides, this analysis is much more costly than the process of calculating regular consumer loan terms. It requires better-qualified specialists, a different methodology, and oftentimes a credit committee has to be convened. Thuswise, many banks involved in mass retail business prefer not to work with entrepreneurs.

Clearly, to obtain a loan an entrepreneur has to go to a bank specialized in SME crediting. And in turn, these banks need to undertake consumer crediting for SME owners as well.

Besides, the consumer credit rates in these banks should come lower than those of retail banks. The bank that makes a decent analysis of client’s business and assesses its financial strength and development prospects can afford to substantially lower the risk premium included in credit rate. And this rate will therefore differ notedly from the one when lending money to a man of the street.

Business analysis performed to grant a loan should be seen as an investment into corporate client relationship development. This will help to carry the costs, since after granting a personal car loan to a businessman this bank can also offer them a business development credit, settlement services, payroll card program, bank collections, and other services.

And what’s important is that personal credit history of a businessman may substantially increase their chance to get their business credited as well. It is commonly known that the personal credit history information, with consent of the customer, can be transferred to the Credit Bureau. Sure enough, when deciding on whether or not to grant a loan to an enterprise a bank would first do some personal security clearance and owner’s credit history research. And if personal credit history is positive, there is a decent chance that the bank will lend money to the business as well. They say “whoever can be trusted with very little can also be trusted with much”. However, in this case it is also true the other way around – a good credit history of a business can also make a positive affect on personal lending desiosions.

Ideally, banks involved in SME crediting should also take business owners crediting as one of their main focuses. And if this process comes en masse, its worth considering some standardization for business analysis system, just like in case with retail credit scoring system. Apparently, this system has to be more complex and deeper than the Scoring System, but the concept is the same: a well-qualified employee has a decent chance to find a job, a well-organized business has a decent chance to survive, and it’s owner has a decent chance to retain the solvency.